1995 Ad

National Review, March 7, 1994 by Ed Rubenstein

The Wrong Numbers

THE DEFICIT is down. Growth in federal spending is less than the inflation rate. From a distance the 1995 budget seems to be, in President Clinton's words, the "toughest budget on spending cuts Congress has yet seen."

A better gauge of this Administration's spending proclivities is the projected trend in domestic spending-i.e., total spending less defense, interest payments, S&L bailout costs, and foreign aid.

Over the next five years Mr. Clinton proposes to increase real domestic spending by $143.9 billion (constant 1993 dollars), or 14 per cent. The share of GDP devoted to such spending would rise to 16.2 per cent, exceeding even the level at the end of the Carter Administration.

The 1993 Budget Act supposedly "capped" discretionary spending in nominal dollars, forcing real spending reductions. The defense budget, however, will bear the brunt of this restraint.

The Clinton budget pours money saved at the Pentagon into job training, Head Start, infrastructure, data highway entitlements, and other "investment" programs. As a result, discretionary spending will rise by $9 billion (1993 dollars) in 1994, and another $5 billion in FY1995, a 6 per cent real rise in just two years. Fiscal discipline, such as it is, is evident only after the 1996 election.

This budget looks good in comparison to the Bush-Darman spending explosion. But the last really "tough" budget occurred in the Reagan years. By 1988 discretionary spending had been slashed nearly 20 per cent below its 1980 level.

But the big problem isn't discretionary spending. Almost half, $730 billion, of all federal outlays this fiscal year consist of entitlements. By 1999, even

if the Clinton health plan is enacted and works as advertised, entitlements will rise by $325 billion and account for 56 per cent of all outlays. Wither the deficit? In his State of the Union, the President touted a sharp decline--"40 percent lower than was previously predicted." But the previous prediction was made before his $262 billion tax hike. Recent history demonstrates that actual revenues rarely attain predicted levels.

When the Social Security "surplus" is netted out, the deficit outlook is less than impressive: In the long run the relationship between federal debt and the size of the economy is crucial. Debt cannot grow faster than GDP without creating financial instability. Eventually investors demand exorbitantly high interest rates, or cease buying federal debt entirely, reflecting doubts about the government's ability to raise sufficient revenues to pay interest.

The government's own numbers show the national debt increasing by more than $1.5 trillion over the next five years. With GDP growth lagging debt growth, the nation is in a dangerous debt trap.

  FEDERAL DOMESTIC SPENDING
        (Billions of 1993 Dollars)

           Discre-        Mandatory               As Percentage
           tionary        Entitlements       Total    of GDP
1975       $180.0         $443.7             $623.7   15.3%
1980       227.5          513.7              741.2    15.9
1988       185.5          578.7              764.2    13.6
1993       229.4          760.9              990.3    15.7
1994E      237.6          781.9              1,019.5  15.8
1999E      244.2          919.2              1,163.4  16.2

Source: CBO. Calculations by author.

  THE DEFICIT: STILL UNSUSTAINABLE
           ($Billions)

         Official ex Social         Gross Federal Debt
         Deficit    Security               As Percentage
                 Total     of GDP

1993     $-254.7     $-300.0      $4,351.2      69.2%
1994      -234.8      -290.0       4,676.0      70.4
1995      -176.1      -236.0       4,960.1      70.7
1996      -173.1      -239.8       5,267.1      70.9
1997      -180.8      -259.9       5,601.3      71.5
1998      -187.4      -276.1       5,953.5      72.0

Source: OMB, FY1995 Budget.